Let’s begin with this past week’s economic data reports. They’ve been, in a word, pathetic. The Fed decided to leave rates unchanged while shrugging off the poor data and not changing plans for two more rate hikes this year.
Consumer spending, wages, and inflation were all a disappointment but Lance Gaitan at Dent Research observes on Friday, May 5, 2017, “The employment report was a pleasant surprise. New jobs were at the high end of estimates and the unemployment rate dropped to 4.4%. The one head-scratcher was that labor participation actually dropped.”
Thanks to Dent Research, provided here is our weekly information roundup ending the week of May 5, 2017. We start each subject with what you hear in the news and finish with what that information means to you. We hope this information will help you separate the noise from the news.
The U.S. Economy Created 211,000 Jobs in April and the Unemployment Rate Dropped to 4.4%… This is the lowest unemployment rate since the middle of 2007.
What it means – The March jobs numbers were revised lower by about 20,000, so the two-month average for March and April is about 140,000. That’s not great, but not terrible. The average work week ticked up 0.1 hour, but overtime dipped 0.1 hour.
The biggest gains were professional and business services, along with leisure and healthcare. Interestingly, these are the exact categories where our old friend, the birth/death adjustment, added the most jobs. Using their estimate/guesstimate model, the number crunchers at the Bureau of Labor Statistics added 255,000 jobs to the April figures, which is more than the actual survey results of 211,000!
This is one more month where the numbers look good, but they haven’t translated into strong wage growth or even moderate economic growth.
The Federal Reserve Held Rates Steady… As widely expected, the Fed held short-term interest rates in a range of 0.75% to 1.00% at their latest meeting.
What it means – Since the decision was expected, no one cared. But investors took note of the Fed’s press release, which glossed over the softness in recent economic reports. With first-quarter GDP at a mere 0.7% and other measures showing weakness, the Fed called such things “transitory,” and reiterated its view that the U.S. economy is on track. For a group that’s data driven and prone to move with the latest development, it’s hard to see why they’ve suddenly developed conviction about the state of economic affairs.
The markets put the chance of a June rate hike at more than 80%, but I think another hike later in the year is a toss-up.
Interest rates crept higher the day after the meeting, but the difference between short-term and long-term rates is slim, indicating a flat yield curve and modest economic growth.
Atlanta Fed’s GDPNow Model Initially Estimates Second-Quarter Growth at 4.3%... The model uses current economic releases to update its forecast throughout the quarter.
What it means – This is important only because of how things went in the first quarter. In January, the GDPNow model pegged first-quarter growth at 3.2%, then bumped it up to 3.5%. But as time wore on, and more data came out, the model kept lowering estimates until it reached 0.2%. The actual number was 0.7%. So, while the first shot of 4.3% might sound awesome, we just should keep in mind that as the facts change, so will the forecast.
Greek Lenders Reach Deal with Government Officials… The European lenders holding up the next round of Greek bailout funds reached a tentative deal with the country’s leaders to cut pensions, raise taxes, and change employment laws in exchange for the funds.
What it means – This is not the end game. Getting these euros in the door is nice for Greece, but it’s not what they really want. They’re looking for lower interest rates on outstanding bonds and extended maturities. That would effectively lower their payments, easing some of the burden. There’s a name for this… it’s called default. If you pay back less than you owe, then you’ve defaulted on part of your debt. And Greece can only make the lowered payments by running a budget surplus for many years, which is, in a word, unlikely.
The entire thing is just a farce to make it look like Greece pays its debts so that banks in other countries don’t have to write down or write off their Greek bonds. If this link didn’t exist, I’ve no doubt the rest of the Eurozone would have kicked the Hellenic state to the curb years ago. But it doesn’t change the facts. Greece can’t pay all it owes. Something’s gotta give.
European Union (EU) Negotiators Bump the Brexit Bill to $110 Billion… The EU representatives now estimate that Britain must pay more than $100 billion to satisfy their obligations before they can exit the union.
What it means – It started around $50 billion, then $66 billion, and now over $100 billion. Currently, the EU is all stick and no carrot. EU officials have said that the divorce must be settled – including the payment number – before any trade negotiations begin. It’s hard to see how that serves British interests in any way. At some point, the Brits will simply say, “Goodbye,” which is bad for everyone.
Given how the Europeans caved when it came to Greece and other problems, it’s hard to believe they’ll stand firm on such a big, important deal as Brexit. The economic bloc’s GDP now sits at 1.7%, which is hardly a cause for celebration, and it isn’t strong enough for the group to shut the door on major trading partners.
Puerto Rico Files for Court Protection… After failing to reach a deal with creditors, the Commonwealth filed for a version of bankruptcy afforded to it by congress last year.
What it means – Now the fun starts! Puerto Rico owes roughly $73 billion to creditors, and has a $45 billion pension liability that is $41 billion (yep, 90%) underfunded. But the Commonwealth has a constitution that guarantees the payment of all government debt before any other expenditure, like pensions, salaries, education, etc. When push came to shove, the government offered general obligation bondholders (those with the clearest claim on assets) about 77% of what they are due. The bondholders balked, as did all of the junior creditors who saw themselves getting nothing.
As this plays out, it’ll be ugly. The bondholders will get robbed of their lawful value. And it will serve as a model for Illinois and other at-risk states. Chaos will ensue once stakeholders realize they can steal from bondholders with abandon by simply refusing to pay, and that they’ll be backed up by the courts.
April U.S. Auto Sales Down 4.7% Over Last Year… GM sales fell 5.8%, while Ford and Fiat Chrysler reported drops of 7.1% and 7.0%, respectively.
What it means – Is it buyer fatigue, lender fatigue, or simply oversaturation? Or does it matter? Carmakers are offering the highest discounts and incentives since the financial crisis as they try to move steel out the door, and it’s not working. Meanwhile, banks are suddenly skittish about sub-prime auto buyers who are defaulting at the highest rate in a decade. Add to that lower residual values, and you have all the makings of an auto slump.
This is bad news for the car industry, employment, and lending. To provide a sense of scale, GM has almost 950,000 cars in inventory, enough to satisfy 100 days of sales.
As auto sales slide, economic data should go with it. Unless things turn around for Detroit in May, it will be hard for the Fed to raise rates in June.
Next Week – The second week of May is even lighter on economic reports than the first. About the only thing of note is retail sales.
The information presented here has been provided by HS Dent. HS Dent is an economic research company that uses various techniques to study the potential impact of various changes in demographic trends in our economy. No one person or strategy can accurately predict market movements. Certain statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be place on such statements because, by their nature, they are subject to known and unknown risks and uncertainties.
The opinions in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.
Indices are unmanaged measures of market condition. It is not possible to invest directly into an index. Past performance is no guarantee of future results. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Securities and advisory services offered through National Planning Corporation (NPC), Member
FINRA/SIPC, a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies.